Exam 3: Taxes As Transaction Costs

Mr. Wills invested in a business that will generate $75,000 annual after-tax cash flow in years 0 and 1 and $90,000 annual after-tax cash flow in years 2 and 3. Compute the NPV of these cash flows at a 10% discount rate.

When the tax law applies differentially to transaction alternatives, decisions should focus on before-tax earnings.

Use the present value tables included in Appendix A of your textbook to compute the NPV of $8,400 received in year 0, $4,950 received in year 1, and $3,000 received in year 2 at a 7% discount rate.

Wilson Company has $100,000 in an investment paying 6 percent per annum. Each year Wilson incurs $1,200 of expenses related to this investment. Compute Wilson's annual net cash flow from this investment assuming the following. A. Wilson's marginal tax rate is 10 percent and the annual expense is not deductible. B. Wilson's marginal tax rate is 35 percent and the annual expense is deductible. C. Wilson's marginal tax rate is 25 percent and one-half of the annual expense is deductible.

Private market transactions create an opportunity for bilateral tax planning.

Which of the following statements about tax minimization is true?

Use the present value tables included in Appendix A of your textbook to compute the NPV of $12,500 received in year 5 at a 6% discount rate.

Mrs. Scott loaned $100,000 to her daughter Evelyn, who agreed to pay her mother $3,000 annual interest on the debt. This loan is an example of a/an:

Omar Inc. paid a $24,000 expense, only $10,000 of which was deductible. Which of the following statements is false?

Mr. Trail engaged in a current-year transaction generating $50,000 cash but only $40,000 taxable income. If Mr. Trail's marginal tax rate is 40%, compute his after-tax cash flow from the transaction.

The tax law prohibits related party transactions.

Mr. Jessel sold 4,200 shares of stock in a publicly held corporation through his stock broker. This transaction occurred in a private market.

A business strategy that reduces the tax cost of a transaction always increases the NPV of the transaction.

XYT Company engaged in a transaction that generated $50,000 cash deposited in the company bank account and required the company to pay $12,000 out of that account. XYT's marginal tax rate is 30%. Which of the following statements is false?

Unlow Inc. must choose between two alternate transactions. Transaction 1 would generate $160,000 cash, all of which would be taxable, while transaction 2 would generate $120,000 cash, none of which would be taxable. Determine the marginal tax rate at which the after-tax cash flows from the two transactions are equal.

A dollar available today is always worth more than a dollar not available until a future period.

Reid Inc. received a $90,000 cash payment, only $50,000 of which was taxable income. If Reid's marginal tax rate is 40%, compute Reid's after-tax cash flow.

Which of the following statements about discount rates is false?

Hower Inc.'s tax advisor recommends that the corporation take a deduction that the IRS has disallowed for other corporations in similar circumstances. If Hower decides not to take the deduction, it is reducing:

If a taxpayer decides to take advantage of an ambiguous tax issue to reduce future tax costs, the decision increases: